Investment ideas

Impact with Microfinance

Dominik Pross, Junior Investment Strategist, and Viktor Beck, Senior Fund Analyst
Reading time: 2 Min
How to achieve a big impact in emerging markets with small amounts.

Microcredits provide an opportunity for many people in developing countries who otherwise would be denied access to traditional bank lines of credit. The concept is still young, but already it has been awarded the Nobel Peace Prize.

The focus is on developing countries where a large proportion of the population lives in poverty. The aim is to grant loans that enable those people to establish a livelihood and work their way out of poverty. Such finance plays a considerable role in the achievement of the UN’s 17 Sustainable Development Goals (SDGs). Combating hunger and poverty is the primary goal here, but the efforts also extend to other areas of concern such as gender and racial inequality.

According to the Convergences network, which specialises in this form of financing, there were close to 140 million microcredit borrowers worldwide in 2018. These loans constitute the seedbed for micro-enterprises but are also taken out to finance and expand small existing businesses.

Moreover, they frequently serve as a door-opener since local banks would otherwise classify the borrowers as uncreditworthy due to a lack of collateral, thereby denying them the chance to start their own business and thus escape poverty.

Some 80% of these loans are taken out by women: according to the International Labour Organisation (ILO), many microfinance institutions intentionally focus on female borrowers out of equal-opportunity considerations and the fact that they are crucial contributors to the wellbeing of their families. Several ILO studies have also revealed that the children of these women have a greater likelihood of receiving uninterrupted formal education.

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